Detroit’s Water & Sewer Bonds Fall Deeper Into Junk

By Johanna Bennett

Standard & Poor’s is taking Detroit’s water and sewer system to the woodshed. The rating service cut the city’s water and sewer bonds five levels to CCC, its fifth-lowest grade, from BB-as Detroit goes through bankruptcy.

City Emergency Manager Kevyn Orr’s plan to reduce $18 billion in debt classifies these types of bonds as secured while calling general obligations unsecured. Investors in the $3.7 trillion municipal-bond market are watching the proceedings closely to see how various debt classes are treated.

The city’s water system serves about 40% of Michigan’s population and accounts for $5.8 billion of Detroit’s debt. Orr has proposed leasing the system to a new regional public authority to help pay for services, but surrounding counties have so far balked. The city is reportedly now in talks to privatize.

Moody’s Investors Service rates the water department’s senior debt B1, and Fitch Ratings has the securities at BB+, both below investment grade.

U.S. Bankruptcy Judge Steven Rhodes is scheduling hearings to consider the city’s restructuring road map. According to media reports, he wants to appoint at least one expert to help evaluate the city’s plans.